Karachi Stock Exchange Stellar
Performance; A Green Pasture or a Deadly Moat?
Karachi stock exchange has performed surprisingly well in
the current year also. The annual report released last year said that KSE 100
index yielded return of 29 % which was highest amongst regional markets. The strange thing is that Pakistan’s economy
cannot be compared to anything with developed world. Pakistan as a country is
marred by excessive shortage of power and energy which has resulted into long
shut downs of power and unavailability of gas for the production units. On the
scales of power consumption per capita Pakistan ranks with the lowest countries
in the ladder with just 450 Kwh consumed per capita.
Contrasting these facts is the pleasant performance of our
stock market that has been giving out returns which were in access of the stock
markets from the developed world including NASDAQ which
gave a return of 25% for the same period. If we compare other stock markets
like Singapore, Jakarta, Vietnam, and India with Karachi stock exchange, its
performance can be ranked amongst the top tier.
This apparent anomaly has kept everyone thinking about the
reasons behind the great rally. “The Economist” considers that the strong performance
is partly due to improving conditions in Pakistan, including a reasonably free and fair
election followed by a peaceful handover of power. The slowing down
of the BRIC economies has also driven investors to try out ever
more unusual markets. Some reasons as indicated by KSE itself are strong
underlying corporate earnings’ growth and de-leveraging. Another reason is
“attractive valuations” as the market capitalization-to-GDP ratio is also very
low.
Stock exchange has been seen as an institution which helps
any economy in raising capital for its businesses; existing and new. KSE has a
market capitalization of above 6 trillion Rs. The number has jumped astronomically in the
last one year and in the analysis of “The Economist” it is due to the amnesty
passed in January 2012. The authorities affirmed that from that date, investors
would be allowed to buy shares with no questions asked about where their money
came from. The remission, which is due to last until June 2014, is designed to nudge
people with undocumented funds to invest them in the market, thus bringing the
cash into the formal economy. This has worked it appears. The average daily
volumes traded on the KSE have more than doubled after this scheme was
announced. This means that KSE managed to induct quite a lot of money from the
undocumented sector to the documented realm. By some measure this is also a way
of capital formation as it is only the white money that can give rise to
corporate capital and new projects.
Stock exchanges always have been a target of a lot of ridicule
lately. There was a lot of mayhem in front of the Wall Street in the last year with
occupy Wall Street activists and also Wall Street has not been saved from the
fun that has been made out of it. On a lighter side I think we refer to Warren Buffet.
Today, Buffett's personal net worth is around $55 billion and his investment
firm, Berkshire Hathaway, owns a number of prominent American companies
including: GEICO, Dairy Queen, Fruit of the Loom and Helzberg Diamonds. Buffett's
annual letters to Berkshire Hathaway shareholders are highly anticipated; his
writings are widely lauded for their effective storytelling and clear, simple
language. So the quote: “I never attempt to make money on the stock market, I
buy on the assumption that they could close the market next day and not reopen
it for five years.” I think this is good quotation but it has a lot of wisdom that
Warren Buffet has put forth in a lighter manner. Stock market should not be
viewed as a place where quick buck can be made although this is what a lot of
individual investors try to do as they come to the stock market. There was another
good quotation which said “United States has developed the new weapon that
destroys people but leave buildings standing, it is called stock market.”
If we look at these few quotations stock market is seen as
something which does more harm than good to a lot of people that’s why we look
at these of kind of funny quotations. A very important thing we will deal with in
this article is the way normal investors have been understanding the markets and
how they should rather look at it. The focus of this article will be on the
question whether general investors have made similar kind of money while
investing in this market. Have they benefitted to the same extent or again the
market has outsmarted them.
William Bernstein
said "There are two kinds of investors, be they large or small: those who
don't know where the market is headed, and those who don't know that they don't
know. Then again, there is a third type of investor -the investment
professional, who indeed knows that he or she doesn't know, but whose
livelihood depends upon appearing to know."
An important factor is that it is very difficult to predict
the future earnings of a company without going through the data and second it
is further difficult to predict the market price.in the spectacular rise of the
stock market in the last one year and so if you see the stock market has
consistently turned all the analysis upside down by way of its own performance as
compared to the economic data. Let me
give you some examples here, CPI in
November 2013 was higher than expected at 10.9 % YOY, foreign exchange reserves
have been skipping downwards by that time they were close to 8 Billion dollars
only and there were troubling news on
account of foreign exchange receipts by virtue of the funds that were expected from
the privatization of PTCL. Further there was troubling news with respect to the
targets that were suggested by the IMF with regard to fiscal deficit. Data on General Economic Front did not present
a very rosy picture. If you couple it with the energy shortfall which was almost
to the tune 5500 MW and the shortage of natural gas in the system there by making
it impossible to run the industries. Further on top of it the problems of gas
with the fertilizer sector which would impact the availability of urea and
further down the line prices of fertilizer having it negative effect trickling
on agriculture.
With all the above in formulating the general scenario the
market performed remarkably positively. If you look at the various analysis and
recommendations by the research houses of the top brokerage houses in Pakistan
we saw that a number of stocks were breaking the upper level expectations of
the analyst. Just given an example there were recommendations about the PPL
having a target price of 236 in October in various research reports and that
time the stock was trading at 195 but in November we saw the stock climbed up
to 290 a share. So the market has a mind of its own! Proved once again here!
We can compare some research reports and calls by various
research houses for 2013 with the actual year end market prices and earnings of
a few companies to understand how right or wrong the forecasts hold against the
real results. We compared the research
paper of a leading brokerage house with the actual results, for Fauji
Fertilizer the call was buy with a target price of 136, actual Dec end price
was 112. Likewise Nishat Chunian power target price was 25 but it achieved Rs.
34.78 by the year end. However the target price matched the actual year end
market price for PTCL that was trading at Rs. 28.44. We can go on and on in
this comparison and find similar kind of very mixed results with a majority of
mismatch between the target prices and actual results.
This puts all those investors in a lot of confusion who look
at the research reports and tend to take recommendations by the analyst very
seriously. They use this data to make their investing decisions based on
recommendations of buy, sell and hold
by the renowned research teams of leading brokerage firms. This mismatch between the research and the
actual can be captured in a very good quote that appeared in an article “All of
this shows that the market has mind of its own and most of what is taught about
investing in business schools is theoretical nonsense. There are very few rich
professors.”
All this shakes the confidence of the ordinary investor as
to how he should understand the recommendation which he reads in the research
reports or which he listens from the analyst by virtue of seeing them on the talk shows or taking advice
directly. In a recent research which has
been published by Dean of Harvard Business School, Nitin Nohria along with
Boris Goryseberg, Paul Helay and George Cerafem; they tried to look into this. They
surveyed one thousands analyst in Asia, Europe and America asking to them to rate
one thousand large companies on twelve factors on a scale of one to five and forecast revenue growth and gross margin
on the basis of the ratings assigned by them. They found out that the strongest
determent of the buy and sell recommendations by any analyst was “projected
industry growth” which was followed by “the top management team”. But the
commonality in the analysis tends to fade ahead of this as there were quite a
lot of differences. First of all the
analysts in the survey differed in what kind of weight they assigned to various
factors. For example “a very well communicated strategy” was very important
thing with the US and European analysts but it was low importance to the
analysts of other regions. Likewise the importance of the “governance” was
rated much higher by the US and the European analyst as compared to Latin America
and Asia. This signifies that analysts are analyzing based their own tools
along with their on biases and understandings of the sector and also based on
the relative weight which they place on various factors. Ordinary investor has
to understand some what the mind of the analysts before following them blindly.
I have come across a number of investors who are happy in
investing in individual shares but they tend to shy away from investing in the
market through the mutual funds. There can be many reasons for that which is
not the scope of this article but it appears that actively trading in
individual scrips has some kind of thrill attached to it. This dose of adrenaline
is not available in the boring method of taking up some units in a fund and
then divesting them after a long time. Although if someone has done that by
investing in a fund that represents the whole market (Karachi Stock Exchange) ,
he or she would have made a killing just by tracking the performance of Karachi
Stock Exchange.
For the individuals a right strategy to make money from the magnificent
KSE would be to follow some pieces of advice from Warren Buffet. Using excerpts
from an article by “Schuyler Velasco” of Christian Science Monitor:
·
“It's far better to buy a wonderful company at a
fair price than a fair company at a wonderful price.” This is one of Buffett's more famous quotes,
and it reflects one of the basic tenets of his investment strategy: He sticks
with companies he can fully comprehend, and ones for which the intrinsic value
is self-evident, regardless of the current state of their finances. It's a
philosophy that has served him well;
·
“I try to buy stock in businesses that are so
wonderful that an idiot can run them. Because sooner or later, one will.”
·
“The stock market is a no-called-strike game.
You don't have to swing at everything – you can wait for your pitch. The
problem when you're a money manager is that your fans keep yelling, "Swing,
you bum!"
·
“Price is what you pay; value is what you get.
Whether we're talking about socks or stocks, I like buying quality merchandise
when it is marked down.”
·
“Never count on making a good sale. Have the
purchase price be so attractive that even a mediocre sale gives good results.”
·
“If you understood a business perfectly and the
future of the business, you would need very little in the way of a margin of
safety.”
·
“'We've long felt that the only value of stock
forecasters is to make fortune tellers look good. Even now, Charlie Munger and
I continue to believe that short-term market forecasts are poison and should be
kept locked up in a safe place, away from children and also from grown-ups who
behave in the market like children.” Charlie
Munger is Buffett's longtime business partner and the vice chairman of
Berkshire Hathaway.
Karachi Stock Exchange has emerged as a darling for the
investors and without doubt its performance has dazzled the local and foreign
investors both. But more often than not the individual investors follow rumours
and botched assessments mostly based on nothing concrete and professional. This
leads to destruction of value and loss for the individuals. If the individual investors follow sound
advice and invest properly instead of following leads based on speculations or
emotions, they would be able to ride the crest of this wave of profitability
and returns.
(The writer can be
reached at kashifmateenansari@post.harvard.edu)
